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Should You Sell JD Sports Fashion plc (LON:JD.) At This PE Ratio?

I am writing today to help inform people who are new to the stock market and want to better understand how you can grow your money by investing in JD Sports Fashion plc (LON:JD.).

JD Sports Fashion plc (LON:JD.) trades with a trailing P/E of 17.4x, which is higher than the industry average of 12.2x. While JD. might seem like a stock to avoid or sell if you own it, it is important to understand the assumptions behind the P/E ratio before you make any investment decisions. Today, I will deconstruct the P/E ratio and highlight what you need to be careful of when using the P/E ratio. View out our latest analysis for JD Sports Fashion

Breaking down the P/E ratio

LSE:JD. PE PEG Gauge June 21st 18
LSE:JD. PE PEG Gauge June 21st 18

The P/E ratio is a popular ratio used in relative valuation since earnings power is a key driver of investment value. By comparing a stock’s price per share to its earnings per share, we are able to see how much investors are paying for each dollar of the company’s earnings.

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P/E Calculation for JD.

Price-Earnings Ratio = Price per share ÷ Earnings per share

JD. Price-Earnings Ratio = £4.15 ÷ £0.238 = 17.4x

The P/E ratio isn’t a metric you view in isolation and only becomes useful when you compare it against other similar companies. We want to compare the stock’s P/E ratio to the average of companies that have similar characteristics as JD., such as size and country of operation. One way of gathering a peer group is to use firms in the same industry, which is what I’ll do. JD.’s P/E of 17.4x is higher than its industry peers (12.2x), which implies that each dollar of JD.’s earnings is being overvalued by investors. As such, our analysis shows that JD. represents an over-priced stock.

Assumptions to be aware of

However, before you rush out to sell your JD. shares, it is important to note that this conclusion is based on two key assumptions. The first is that our “similar companies” are actually similar to JD., or else the difference in P/E might be a result of other factors. For example, if you compared lower risk firms with JD., then investors would naturally value it at a lower price since it is a riskier investment. The second assumption that must hold true is that the stocks we are comparing JD. to are fairly valued by the market. If this is violated, JD.’s P/E may be lower than its peers as they are actually overvalued by investors.

What this means for you:

You may have already conducted fundamental analysis on the stock as a shareholder, so its current overvaluation could signal a potential selling opportunity to reduce your exposure to JD.. Now that you understand the ins and outs of the PE metric, you should know to bear in mind its limitations before you make an investment decision. Remember that basing your investment decision off one metric alone is certainly not sufficient. There are many things I have not taken into account in this article and the PE ratio is very one-dimensional. If you have not done so already, I urge you to complete your research by taking a look at the following:

  1. Future Outlook: What are well-informed industry analysts predicting for JD.’s future growth? Take a look at our free research report of analyst consensus for JD.’s outlook.

  2. Past Track Record: Has JD. been consistently performing well irrespective of the ups and downs in the market? Go into more detail in the past performance analysis and take a look at the free visual representations of JD.’s historicals for more clarity.

  3. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.


To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned.